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Guess What Happens Next

Courtesy of Keith Dicker of IceCap Aset Management

Well, if you’re not Greeked-out by now you should be. After all, the Greek debt crisis has been spinning in and out of control for 5 years and counting.

Why should it be any different this time?

Everyone knows there is no way on this earth that Greece will ever be able to repay these debts. Unless the Greek economy can grow faster and longer than it has ever grown before, AND it can avoid the political temptation to never again spend more money than it collects in taxes – then just maybe it stands a chance of paying off some of the over $400 Billion it owes.

In today’s age of money printing, negative interest rates, and bank bailouts, many have become somewhat desensitized to “billions” and “trillions”. Yet, we assure you $400 billion for Greece is a lot of money.

For perspective, Australia owes about $1.3 trillion in various loans. If Australia suddenly entered a debt crisis on the same scale as Greece, its debt owing would skyrocket to nearly $2.5 trillion, or put another way – about $106,000 for every man, woman and child.

For Greece, it’s mathematically impossible to repay its debt. If anyone else tells you otherwise, it means they have no understanding whatsoever of how real economies actually work.

The sharpest and brightest minds at the IMF, the EU and the ECB (collectively referred to as the TROIKA) all agree that the solution to the Greek crisis is for Greece to pay more in taxes, for the Greek government to spend less money, and to continue to pay off its debt.

Let’s think about this for a very quick second:

  1. Greeks have to pay more taxes, which means less money is available for spending
  2. the Greek Government has to spend less money, which means less money is available for spending
  3. and of the money that the Greek government does spend, more of it has to be used to repay its debt, which means less of it is available for real spending;

And considering that economic growth is a function of aggregate spending, how on earth can any sane person expect the Greek economy to recover and grow?

The answer: they can’t. For further proof why it doesn’t work and it will never work, you just have to look at Iceland.

Iceland was the very first country wiped out by the 2008 global debt crisis. The Icelandic government and the Icelandic banks completely mismanaged everything for which they were financially responsible.

And when everything hit the fan – no one come running to save them, in fact, the complete opposite happened. Both Britain and the Netherlands threatened to completely wipe Iceland off the global financial map.

At the time, Icelandic banks offered regular banking accounts in Britain and the Netherlands that paid 6% interest. Considering other global banks offered 3% and less, and also considering that the vast majority of people in the world have no idea how a bank is structured; thousands of British and Dutch savers blindly ploughed their savings into these Icelandic bank accounts.

After all, it was a bank deposit, it was guaranteed by the bank and 6% is greater than 3%. Where was the risk with this?

Next, when the crisis hit Iceland – all bank accounts were frozen, and the savings of many British and Dutch investors melted away.

Suddenly, the risk with 6% was crystal clear. Naturally, the British and Dutch governments both demanded their citizens be repaid for making stupid investment decisions.

The Icelandic government meanwhile, finally woke from their frozen state and assessed the situation. Not only did the government not have enough money to repay bank depositors, it didn’t have enough money to pay themselves.

And since no one would lend Iceland any money – the country was officially broke. The rivers would stop running, the glaciers would stop flowing, and the thermal baths would stop steaming – or so we were told.

Instead, Iceland allowed its banks to collapse, allowed its currency to drop by over 70%, decided not to pay back all of the money it owed, and finally – it actually imprisoned certain bank executives for putting the country into such a financially toxic position.

A comparison between the Icelandic approach and the European approach forced upon Greece is as follows:

 

And as for the outcome, the chart below clearly shows the economic recovery experienced by both countries, over the exact same time frame, and using completely opposite solutions.

 

Iceland’s economy has recovered from the depths of the crisis and is now only -3% less than where it was in 2008.

Greece’s economy continues to plummet to deeper depths and is now -33% less than where it was in 2008.

The Icelandic recovery has not been perfect. Locals and foreign investors have been unable to get money out of the country. Originally, capital controls were expected to last 6 months. 7 years later they are finally being relaxed. That’s a long time not being able to access your money.

In addition, prices for all things soared with inflation hitting 20% at one point. Job losses also soared with unemployment tripling.

Yes, bad times were had – yet the country and economy survived. Greece meanwhile, continues to be subjected to a 100% guaranteed doomed strategy.